High stakes for Tunisia after IMF agreement

Oussama Romdhani for The Arab Weekly

Tunisian officials breathed a sigh of relief on October 15 after the International Monetary Fund announced preliminary approval for a $1.9 billion loan package. The country’s politicians viewed it as a vote of confidence for their policies, while government technocrats felt vindicated in the way they had negotiated the deal.

The protracted talks over the agreement took more than 15 months and occurred amid Tunisia’s worsening financial crisis and growing doubts about the prospect for agreement.

By itself, the relatively small loan will not alleviate Tunisia’s budget deficit, which is expected to reach 9.7 percent of GDP this year and its nearly $40 billion debt burden.

But the authorities hope the deal will unblock bilateral loan agreements and be the stepping-stone for economic recovery.

Success in this regard will hinge on the credibility of Tunisia’s diplomatic pitches as the country tries to convince Western partners and oil-rich regional donors to come to its aid.

If approved by the IMF Executive Board in December, the loan is expected to be disbursed in eight installments of less than $250 million each, starting in January. The intermittent release of funds will enable periodic IMF reviews, a routine process in similar loan agreements.

But in Tunisia’s case, the extra caution seems to stem from the country’s inability in recent years to deliver on pledges of reform embedded in other loan deals. Since 2011, successive governments viewed big spending and public-service hiring as necessary to placate discontent, despite their devastating economic costs.

To deliver a comprehensive reform programme this time and to unleash “Tunisia’s potential for inclusive and much-needed job-rich economic growth,” as envisioned by IMF Middle East and Central Asia Director Jihad Azour, political and social stability will be crucial.

Almost nobody in Tunisia would dispute the IMF’s objectives to see the government unfetter private initiative, encourage investment and introduce greater tax equity. What is controversial, however, is the desire to cut public spending,   including civil service wages and what the IMF calls “generalised wasteful price subsidies.”